Updated iPhone Demand Models Increase Steve Milunovich's Confidence In Apple

UBS analyst Steven Milunovich detailed in a note on Wednesday why he now has more confidence in Apple Inc. AAPL.

Milunovich updated his iPhone demand model and continues to expect "moderate single-digit" unit growth in fiscal 2017 followed by a "strong gain close to 20 percent" in fiscal 2018. The analyst added that he also has a "higher confidence in at least some growth" for the upcoming iPhone 7.

As such, Milunvocih raised his fiscal 2017 iPhone estimate from 207 million units to 222 million units, representing a 5 percent growth rate. His fiscal 2018 estimate was also bumped from 240 million units to 264 million units.

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"Our model shows that an iPhone unit decline in F17 probably requires less than 40% of the F15 base to upgrade in two years," the analyst explained. "This would be a significant lengthening of the upgrade cycle since we estimate that 50-60% of each prior class upgrades in two years."

Milunovich added that even assuming only 41 percent of the fiscal 2015 base upgrades in fiscal 2017 yields an upgrade unit growth of 17 percent next year.

Milunvoich also pointed out that his upgraded model represents the "first time in a while" that he boosted his estimates, which implies further stock gains. However, he did caution that may not be sufficient catalysts to yield a "substantial move up" in Apple's stock.

Nevertheless, the analyst raised his earnings per share estimate for fiscal 2017 from $8.90 to $9.00 and fiscal 2018's earnings per share estimate was also raised to $10.40 to $10.80.

Shares remain Buy rated with an unchanged $115 price target.